New Jersey Estate Planning & Elder Law Blog : New Jersey Estate Planning Lawyer & Attorney : Deirdre Wheatley-Liss : Fein Such Kahn & Shepard Law Firm : Elder Law, Tax Planning

The State recently announced that Michael H. Bryan will be the new Acting Director of the New Jersey Division of Taxation. Per the press release, Bryan is to lead the Division of Taxation in the direction of enhanced communication and support with taxpayers.

The Division of Taxation could use an internal audit on practices and procedures to act more effectively.  While I don't usually find a problem with written communications, it takes several weeks for them to get from the mail room to the person's desk.  My other issue is on phone coverage - when  I call I am often left to a phone that rings and rings with no answer.  

As Bryan is coming from the private sector (Comcast to be precise) hopefully he will bring some ideas oriented at efficient customer service with him.

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Life estates are commonly used in elder law asset protection planning.  Mom owns a house worth $400,000.  She gives the house to her children(a "remainder interest"), and keeps the right to live in the house during her lifetime (a "life estate interest").  The gift of the remainder interest is "transfer" for Medicaid purposes, and starts the clock on the 5 year lookback period.  

The gift of the house subject to a life estate is a popular asset protection planning technique because it is easy to understand and less invasive to lifestyle than other transfer techniques. Making a gift of a remainder interest simply involves the attorney preparing a deed and associated real estate transfer documents.  There are no realty transfer tax consequences - realty transfer tax is not assessed in New Jersey for transfers without consideration (i.e.: a gift). Also, using a life estate technique not much changes from a practical perspective as the life estate holder (ie: Mom) continues to be responsible for all property taxes, maintenance and upkeep - and is still entitled to the Senior property tax rebate.  Perhaps most importantly, you don't spend your house, so it is emotionally easier to give away an interest in a house than to give away cash dollars that you may still want to spend.  For those who think they are at least 5 years away from a nursing home, a transfer of a house subject to a life estate can be a home run as the house tends to be the most valuable single asset.

But what happens from a tax perspective when the owner dies? (Assuming the death is not in 2010 when we have no federal estate tax - see my prior post on estate tax implications for deaths in 2010)

If you give away an asset and keep a life estate in that asset, the life estate acts like a "string" that pulls 100% of the value of the asset into your taxable estate.  From an estate tax perspective, this mean that (1) 100% of the value of the house is included in decedents taxable estate, and (2) the cost basis of the house is "stepped-up" to the value of the house on date of death (IRC 2036).  So, if Mom bought the house for $40,000 and it is now worth $440,000, Mom's estate includes the house valued at $440,000, and kids get the house with a $440,000 basis.  When they sell the house for $450,000 down the road, then they only have $10,000 of capital gain.  The $400,000 of appreciation that occurred during Mom's lifetime essentially disappears (you potentially pay estate tax instead).  If the total estate is less than $675,000 (New Jersey) or $1,000,000 (federal starting in 2011 - unless congress changes it), then there will be no estate tax due.  If there is a New Jersey estate tax, the rate ranges up to 16% on amounts over $675,000 - this is far less than the capital gains tax (15% federal plus 7.5% NJ) on $400,000 if Mom simply gave the house to the kids without keeping the life estate.  

In New Jersey we also need to contend with the Inheritance Tax if the remainder beneficiaries are not children - for example, Aunt gives her house to her nieces and nephews and retains a life estate.  The Inheritance Tax is a separate tax from the estate tax that is assessed against a beneficiary based on their relationship to the decedents - transfers to spouses and children are exempt, transfers to other family members are not.  For example, when Aunt dies, the life estate acts to make 100% of the value of the house subject to inheritance tax (NJAC 18:26-5 et seq).  So, nieces and nephews get the house, but they need pay an inheritance tax at the rate of 15%-16% with no exemption.  The inheritance tax is a credit to the estate tax, so you don't end up paying both taxes if the estate is subject to estate tax and the beneficiaries are not children or spouses.

The benefits of making  a transfer of a house subject to a life estate can significantly outweigh any estate tax or inheritance consequences in many situations.  The key is to get advise for YOUR situation to see if transfer of a house subject to a lift estate make sense to protect your assets from a Medicaid spend-down.

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Real estate tax appeals for both commercial and residential property have been a hot topic.  As the real estate market sinks, many taxpayers find that they are paying taxes on real estate due to assessments made when the value of the property was 20-40% higher.

Up to now if you wanted to file a tax appeal and property assessed up to $750,000, you would have had to have filed in the County Board of Taxation.  Now, they have changed the law so that property assessed up to $1 million must also be filed at the County Board of Taxation. 

The fear is that self service taxpayers will be unaware of the change, file in Tax Court, and then miss the filing date on the county level.  There is no "oops" defense to  missing the filing deadlines.

The law change took place in an amendment to Rule 54:3-21 through Assembly Bill 4313.  The stated purpose of this change in law is to "decrease the overburdened Tax Court's caseload and allow these cases to be heard by county boards of taxation...".

Again, the critical issue is that if a person files a tax appeal in the wrong jurisdiction, you may be considered out of time to then re-file in the correct court of competent jurisdiction.

Specific questions on real estate tax appeals can be directed to my colleague Steve Loeb, Esq. in our Tax Department.

Image: Salvatore Vuono / FreeDigitalPhotos.net

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 Elderlawanswers.com reports today that:

In a much-anticipated decision, the Third Circuit Court of Appeals has affirmed a U.S. district court ruling allowing a community spouse to purchase a DRA-compliant annuity to protect savings from the costs of her husband's nursing home care. Weatherbee v. Richman (3d Cir., No. 09-1399, Nov. 12, 2009)."

This is an incredibly important ruling.  New Jersey is in the 3rd Circuit, so this ruling may have application to New Jersey Medicaid cases.

The Deficit Reduction Act or "DRA" states that a purchase of a Medicaid Compliant Annuity is not a transfer of assets that creates a penalty period under Medicaid.  As I discussed at "Annuity Purchased by Spouse Tarnished in NJ - But is There Light from Other State's Analysis" New Jersey has not enforced the federal law. Instead New Jersey, like Pennsylvania (the state at issue in the case) took the position that a purchase of an annuity by a community spouse is a transfer that results in a penalty period - essentially, even though you used $200,000 to purchase an annuity that can only give you $3500 a month, you are still treated as owning the $200,000 and then penalized for not having it liquid to spend on nursing home care.

In the Weatherbee case, Mrs. Weatherbee purchased a Medicaid compliant annuity for $400,000, which paid her $4,423 a month.  Pennsylvania took the position that the $4,423 a month was an "available resource" that she could sell (i.e.: she could sell the income stream, get a lump sum amount, and spend that amount on care). Normally, an annuity payment is deemed income, and not an asset (assets have to be spent down for Medicaid, but income of the spouse not in the nursing home is not considered).

Pennsylvania's approach (which is similar to New Jersey's) was soundly rejected.  The Third Circuit Court of Appeals confirmed that "treating the income from an otherwise compliant annuity as an available resource is inconsistent with the treatment of annuities under the Medicaid Act."

My colleague Don Vanarelli has a lengthy post  at his blog on the Weatherbee case with some great insight into how it might be effective in New Jersey.   The issue is that while NJ is in the Third Circuit, there are issues of deference and authority between state and federal laws and courts. 

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As winter approaches (which last weeks unexpected snow reminded us is close at hand) a point of irritation bubbles to the top again - trying to get somewhere and dodging the ice, snow and debris from the car in front of you.  You know the car I am talking about - it snowed 3 days ago, and the car in front of you is encased in a 4 inch shiny snow crust with a square cut into the windshield and a rectangle in the driver side window for viewing.  As you are driving behind it you can only watch as sheet after sheet of ice comes sliding off, into your window, and making you almost get into an accident because you can't see.

Well, good news is on they way.  According to the Daily Record "Legislation that would toughen New Jersey's notoriously weak snow-removal law passed the Senate and Assembly in June. Gov. Jon S. Corzine is expected to sign it".

The current law is ridiculous - "Under the 1997 state law, a driver can get a ticket for not clearing a vehicle — but only if the snow dislodges and causes an injury or property damage, and only in the unlikely event an officer is nearby or the victim has the wherewithal to jot down a license plate number." (emphasis added).

While the new proposed law sounds better - it "would create an "affirmative duty" for snow removal with fines of up to $75"  - there will be many exemptions.  These appear to be aimed at:

1. not being responsible for snow accumulation while it is still snowing (reasonable, so long as you cleared your car before your started your drive - not just clear a circle and go),
2. not more than 1 ticket in a day (ridiculous - clean off your car, and if one ticket doesn't motivate you, another one might), and 
3. exempting commercial trucks that are enroute to a place with snow removal equipment (reasonable in the sense that a trucker can't really clean whole rig, but those trucks are a hazard after the storm has passed).  

In typical New Jersey fashion, a fund is supposed to be created with some of the ticket revenue to educate people about the law. Given the state of our State's finance, I think that adding the general revenues would be a better choice.

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 I have always been a huge proponent of public libraries - after all, what could be better than free books?  Over the weekend a New York Times article caught my eye "In New Jersey, Libraries Are Lifelines for Needy".  Apparently, there is better stuff at your local library than free books - there is career research and word processing for those in transition, and information on help available to those in need (mortgage assistance, food stamps, subsidized child care).  

What impressed me was not that our libraries have these resources (as a regular patron I can attest that local libraries are a fountain of information), but that New Jersey's public librarians have recognized that many patrons seeking this information might too uncomfortable to ask for it (especially in their hometown).  So the state librarians came together and created gethelp.njlibraries.org.

The site "provides links to state agencies and nonprofits, and information on jobs, food assistance, military benefits, utility assistance and even free tax preparation for people with low incomes, disabilities or difficulty speaking English."  Among other categories there are compilations of services under the heading of New Jersey Financial Tools, New Jersey Work Tools, and New Jersey Parental Tools.  The is also a link for information for seniors under  Tools For Seniors.

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Sunday September 6 was a banner tax for New Jersey residents - you won't find it on your calendar, but day 249 of the year was the day New Jerseyians finally paid their tax bill for the year.  For the first 249 days of the year New Jersey residents were working to pay for government spending programs - federal, state, local.  For the remaining 116 days of  the year, you work for yourself  - to pay mortgage, utilities, food, clothes, car, vacation, and all the things you value.

Americans for Tax Reform reports that New Jersey has the second longest cost of government time span:

Today is the day on which New Jerseyians have finally paid off the burden imposed by state, local and federal spending and regulations. While the national average fell on August 12 in 2009, taxpayers in the Garden State had to work an astounding total of 249 days out of the year to pay for the cost of government. Only one state, Connecticut, has a later COGD [Cost of Government Day] than New Jersey. 

Note that this is different from Tax Freedom Day, which was April 29 for New Jersey in 2009 (again, the second latest in the country).  According to the Tax Foundation, Tax Freedom Day is "calculated by dividing the official government tally of all taxes collected in each year by the official government tally of all income earned in each year."  Cost of Government Day is different, and later, because it is calculated by the cost of spending, a much greater number than income these days.  For a full breakdown of each states Cost of Government Day, look to Americans for Tax Reform.

I love living in New Jersey, and taxes are necessary to run the government and pay for services, but 48 other states do a better job than we do - not something to be proud of.  

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I love being ahead of a news story.  

I blogged back in August: Moving From Florida?? A Reverse Trend that May Prove Expensive for Residents -  noting that Florida is seeing its first population decline since demilitarization after World War II and that its tax revenue system may be to blame.  The result may be that Florida may be losing its status as the go-to residence for New Jerseyans looking to get out from under New Jerseys tax system particularly its low $675,000 state tax exemption.

 That post of course raises the question of where else is a person to go?  I noted in "Southern States a Tax Lure for New Jersey Residents?" that other states are going out of their way to try to attract retirees as new residents through the structuring their state tax system to give retirees a financial incentive to transplant to sunnier climates.

Now it seems that TIME magazine has caught up to the story in their feature "Florida Exodus: Rising Taxes Drive Out Residents".  TIME notes:

There are many things public officials probably shouldn't do during a severe recession, but no one seems to have told the leaders in Floridaabout them. One thing, for instance, would be giving a dozen top aides hefty raises while urging a rise in property taxes, as the mayor of Miami-Dade County recently did. Or jacking up already exorbitant hurricane-insurance premiums, as Florida's government-run property insurer just did. Or sending an army of highly paid lobbyists to push for a steep hike in electricity rates, as South Florida's public utility is doing.

For states, attracting new residents is good for business - more people equals more revenue. If Florida can't manage its budget in a way that will continue to attract residents, perhaps other states will start offering "deals" to retirees so that dollars will go further in your silver years. perhaps say "CA$H for Change of Address" program is in the making.

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